What They Are, Common Types, & How to Screen Customers

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Certain crimes perpetrated by businesses, groups, and individuals can pose grave risks for countries—and by extension, businesses. To deter culprits from this behavior and promote compliance with global laws, sanctions are imposed to restrict resource flow to the bad actors.

Financial institutions, payment gateways, and businesses, in turn, are saddled with the responsibility of staying compliant by restricting capital flow to the sanctioned.

But what exactly are sanctions? And how can businesses monitor and stay compliant with sanctions in an environment where AML compliance rapidly evolves and is difficult to keep up with? Fortunately, these questions are answered as we explore what sanctions are, how they work, and the different types of sanctions.

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What are Sanctions?

Sanctions are financial and trade-related penalties imposed by one country on another entity (a country, company, or individual). This is done to put economic, trade, political, and other diplomatic pressure on the sanctioned entity to encourage them to change a certain behavior (or set of behaviors).

Self-governing states use sanctions to affect economic, social, political, and military change with countries, institutions, and individuals to manage national—and international—relations.

Generally, sanctions go a long way in limiting the targeted entities' resources, such as financial, technological, or military. The independence, strength, and authority of both the sanctioning and sanctioned body are two very important factors that determine the impact the sanctions will have. The more influence the sanctioning body has, the more likely the targeted entity is to change its behavior.

Sanctions are administered on a case-by-case basis and can last as long as the imposing party deems prudent. Sanctions are typically only lifted if the targeted party is willing to meet the requirements and agree to the terms and conditions of the sanctioning party (or parties). Unwillingness to comply could result in further, more severe sanctions.

Sanctions are a core component of international relations, but they are also used to clamp down on money laundering, terrorist financing, and other financial crimes—as well as the individuals, groups, and even countries involved.

How Do Sanctions Work?

Now that we know what sanctions are, how do they actually work? Who puts them in place? How are they actually established—and subsequently enforced?

Essentially, a self-governed state issues a sanction on another country, organization, or individual. The sanctioning country, its citizens, and any organizations operating within its jurisdiction are required to abide by the sanctions in place. When an international body—such as the United Nations—issues a sanction, all member states are required to honor, abide by, and enforce the sanction. The international body will typically also apply pressure to non-member states to try to enforce compliance with the requirements they’ve outlined.

While sanctions could theoretically be established by any country at any time, they often work best when there is an international agreement on the sanctions being applied. Without a universal standard for what behavior is sanctionable, it’s very hard for the sanctions system to work effectively.

The more nations that agree with—and enforce—a sanction, the greater the impact the sanction is likely to have. Since sanctions are tied so closely with international relations, they are intertwined with the concept of international law.

Reasons for Sanctioning: Why Sanctions are Applied

Sanctions are political and economic decisions, often representing the diplomatic efforts of a country or organization to protect national security and international laws. But sanctions are often a means to an end, with a clear intended consequence or result. In practice, sanctions are enforcement tools used by governments and international organizations to punish, restrain, or otherwise penalize a country, organization, or individual for specific behavior(s).

Sanctions are generally divided into three categories, based primarily on the objective or intended outcome of the sanction. We explore each of the three common reasons for sanctioning below.

1. Force cooperation with international law

One reason for sanctioning is to persuade, motivate, or attempt to force a country, individual, or entity to comply with international laws.

Countries committing war crimes, violating human rights, and abusing diplomatic relations—according to international law—can be sanctioned by other nations in an attempt to persuade and motivate the nation to comply with international laws. Sanctions are imposed to both hinder the nation's ability to continue the current course of action, but also put pressure on the nation to change its behavior.

The United States has long-standing sanctions against North Korea, Cuba, and Syria (and more recent ones with Venezuela) in relation to human rights abuses, foreign military financing, and their status as a Tier 3 country on the Trafficking Persons Report. Sanctions imposed by the United States—and other UN countries—are designed to pressure these countries into changing their policies on human trafficking and other human rights issues.

2. Contain a threat to peace within a geographical boundary

Another reason for imposing sanctions is to contain a threat to peace within a geographical boundary.

Typically, these actions are taken to slow the rate of escalation, limit the spread of the conflict, and generally mitigate the impact of the situation on affected nations—and the international community. With more than just economic costs (loss of life, destruction of property, and more), sanctions can be swift and substantial in an effort to curb certain behavior.

Following the Russian invasion of Ukraine—in just February of 2022—the United States, the European Union, and other Western nations issued new sanctions and expanded existing sanctions on Russian President Vladamir Putin himself and other government members. They also restricted Russian banks’ access to the international payments system SWIFT and froze Russian assets. These sanctions were aimed at containing, deescalating, and stopping the conflict.

3. Condemn acts of a member or non-member nation

The third reason for imposing sanctions is to condemn the actions of an erring member or non-member country.

Unlike the first two situations, which have a certain level of urgency and intensity, sanctions can be applied under this category for a variety of more specific reasons, ranging from the strengthening of foreign policy objectives, punishing rogue or unwanted behavior, and much more.

For example, in November of 1965, the United Nations Security Council declared Ian Smith’s unilateral declaration of independence (UDI) of Rhodesia from the UK to be illegal, and called on Britain to take action to end the rebellion. In turn, Britain imposed economic sanctions against Rhodesia and froze Rhodesian reserves in Britain in early December. Shortly after, Britain instituted a trade embargo on Rhodesian oil. All of these were a way of condemning what the United Nations believed to be a corrupt, racist, and therefore illegitimate declaration of independence.

Types of Sanctions

Generally, sanctions are coercive in nature and are designed to pressure a target country, group, or individual to change its behavior or policies. While sanctions have the same core objective, they can be issued for various reasons and purposes.

Different types of sanctions are used to change different types of behavior. Below, we cover the main types of sanctions.

  • Economic Sanctions: Economic sanctions are financial and trade penalties aimed at impacting a nation, company, or individual economically. Trade barriers, import and export restrictions,  embargoes, tariffs, and other financial restrictions are commonly used as economic sanctions. Economic sanctions are meant to apply substantial costs to the sanctioned entity, forcing a policy or behavioral change.

  • Diplomatic Sanctions: Diplomatic sanctions are political policy measures aimed at impacting a nation, company, or individual diplomatically. Limiting high-level government visits, recalling domestic ambassadors, and expelling foreign ambassadors are all forms of diplomatic sanctions. In extreme cases, international relationships can be restructured or entirely broken.

  • Military Sanctions: Military sanctions are political and trade penalties directly targeting a nation or group's military procurement and financing efforts. Typically, military sanctions are used to curb—or stop—military action. Arms embargoes and other military-related trade restrictions are common forms of military sanctions.

  • Sport Sanctions: Sports sanctions are diplomatic, political, and reputational penalties that target a nation’s, group’s, or individual’s ability to participate in sporting events. These can range from doping violations for individual athletes to participation bans on entire nations. In the latter, the sanction is intended to damage the international reputation—and morale—of the target nation.

  • Environmental Sanctions: Environment sanctions are political and economic sanctions that impact the environment—they are often tied very closely to trade relations. Environmental sanctions are aimed at supporting issues such as deforestation, endangered species, ozone depletion, carbon emissions, and other environmental safety concerns.

The type of sanction is usually determined by the intended outcome of the sanction.

Different types of sanctions are used to account for the myriad of intended outcomes of sanctions. In some scenarios, multiple types of sanctions may be applied. In general, different types of sanctions apply pressure to the sanctioned entities in different ways.

Methods of Economic Sanctioning: How Sanctions Work in Practice

Economic and trade sanctions are some of the most commonly applied sanctions. But economic sanctions can take many forms, depending on what the sanctioning nation tries to achieve.

Below, we explore the different methods of economic sanctioning:

  • Embargoes: Bans trade with a specific country. Generally, embargoes bar all trade with the country, but they can be limited in their reach, banning only trade on particular industries, goods, or services with a specified country. This restriction aims to punish the targeted country for its actions, deny it an avenue to carry out any objectionable policies, and subsequently change its behavior in order to lift the embargo.

  • Export Restrictions: Bans countries from supplying certain goods, services, or intellectual property to the sanctioned nation. These restrictions are commonly used to restrict the supply of specific goods to countries to mitigate their threat or force them to comply with international laws.

  • Import Restrictions: Bans countries from receiving certain goods, services, or intellectual property from the sanctioned nation. These restrictions are commonly used to limit the flow of capital to a nation by restricting lucrative national exports.

  • Export Controls: Bans countries from exporting controlled goods and services to sanctioned countries. Controlled goods, technology, and services could be used against the best interest of the exporting country, and are therefore deemed a threat to national—and potentially international—security. The goal is to restrict the harmful use of the items being traded—because of this, these sanctions are commonly used to target narcotics and weapons. Export controls are more of a protective measure than a punitive one, but they can be levied to manage foreign relations and national policy objectives.

  • Capital Controls: Bans investment in sanctioned countries, industries, or companies or bans access to international markets entirely. By stopping investment—and the flow of foreign capital—to these nations, industries, or companies, it will be harder for them to continue their illegal or problematic activity, and prompt them to change their behavior. Most importantly, it stops the sanctioning entity from financially supporting (whether directly or indirectly ) the sanctioned entity in any way.

  • Asset Freezes or Seizures: Assets that belong to sanctioned individuals, companies, or countries can be frozen or seized, restricting the owner from getting, selling, or transferring the asset. This is used to punish individuals and companies for violating state and international laws and can be a means of pressuring those affected to comply with international law.

  • Travel Restrictions: A ban applied to sanctioned individuals restricting travel to a sanctioning jurisdiction. This can be applied to specific individuals (state officials or private citizens) or the entire nation.

All forms of economic sanctions addressed above have one thing in common—they are being used to influence (typically by restricting) a country’s trading activities directly or indirectly. These measures can be used as foreign tools to counter terrorism, prevent drug trafficking, promote democracy, and prevent money laundering and other financial crimes.

How to Monitor for—and Stay Compliant With—Economic Sanctions

Monitoring for economic sanctions is an essential component of ensuring regulatory compliance—and avoiding the fines and penalties that come with non-compliance. Organizations could even risk being sanctioned themselves.

To meet AML and CTF regulatory standards, organizations must ensure they don’t conduct business with any sanctioned entities. To do this, businesses will need to screen organizations to ensure there aren’t any applicable sanctions that prevent them from conducting business.

In the United States, businesses need to search sanctions lists compiled and managed by the Office of Foreign Assets Control (OFAC). Sanctions screening isn’t the only step to maintaining AML compliance though—organizations need a comprehensive AML program in place to prevent money laundering and fraud threats.

Examples of Economic Sanctions to Learn From

That all sounds good in theory, but to fully understand how sanctions work in practice, we need to look at a few real-world cases.

Below, we look at real examples of sanctions to understand how they work and the impact they have.

1. Long-standing U.S. Embargo on Cuba

Starting in March of 1958, the United States embargo against Cuba is one of the longest-standing embargoes in modern history. Initially, it applied only to arms trades, but by February of 1962—nearly four years later—it applied to almost all trade.

It’s a prime example of the impact that sanctions can have on international trade and relations, lasting more than half a century. This act shows that non-compliance with global laws can stall economic growth and development. In the case of Cuba, financial institutions can neither remit nor receive funds from the United States, and its citizens don’t have the luxury of interacting with businesses in the United States. Organizations are responsible for complying with these sanctions to avoid penalties related to non-compliance—which could amount to sanctions against the organization itself.

2. U.N Sanctions on North Korea

In 2006, the Democratic People’s Republic of Korea (DPRK) conducted a nuclear test—in direct violation of the Treaty on Non-Proliferation of Nuclear Weapons. In response, the United Nations Security Council (UNSC) passed Resolution 1718, banning all military trade and freezing all government assets. Since then, sanctions have been expanded to include the trade of natural resources and fuel.

The United Nations—and member states—continue to put pressure on North Korea to abandon nuclear programs in an effort to control international security. Years of non-compliance—and escalated efforts—have led to the addition and expansion of sanctions. The nation—and its citizens—have lived largely in isolation from the Western world, having long-lasting economic and diplomatic consequences.

3. U.N. Sanctions on South Africa During Apartheid

In November of 1962, the United Nations General Assembly issued economic sanctions to condemn South Africa’s apartheid policies and pressure the area to change these policies. By the end of the 1980s, 25 nations had enacted various trade sanctions on South Africa, putting immense pressure to end apartheid, which would become a reality by 1994.

Economic sanctions, when applied by a collective group of nations, can have a significant and wide-reaching impact on international relations. For this to work, organizations need to do their part to ensure compliance with sanctions.

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Stay Compliant with Unit21’s Risk & Compliance Infrastructure

Organizations are obligated to comply with applicable sanctions—which means they can’t conduct business with any sanctioned entities (whether that’s an individual, a company, or an entire nation).

For organizations to ensure compliance with these regulations, it’s imperative that they screen the OFAC sanctions list for applicable sanctions before entering into a business relationship with a customer. However, sanction screening isn’t the only thing companies need to stay compliant, it’s just one component of a larger anti-fraud and AML compliance program.

Combined with alert scoring, transaction and activity monitoring, and case management, risk and compliance teams can ensure their customers—and their organization—remain protected.

Schedule a demo today to learn how Unit21 can help you build a complete compliance and fraud prevention program.